The deep discounters are doing well but their growth isn't sustainable, says Dr Clive Black

Market share data from Nielsen suggests the sales growth of the deep discounters, namely Aldi, Lidl and Netto, continues apace; 18% in the four weeks to 13 June. Commendable, but hardly surprising. If deep discounters cannot make hay when the recessionary sun shines, when will they?

This cluster of retailers has gained sizeable column inches over the past couple of years. Indeed, Aldi has been a major irritant to UK market leader Tesco, leading the Cheshunt giant to refocus elements of its trading strategy, despite being more than 10 times bigger than its rival.

From Tesco we see the introduction of discount brands, launched partly to fill a perceived void in its range hierarchy, between Value and mainstream - a space the 'deepies' comfortably fill. It has claimed some success in stalling customer drift to the deep discounters.

Indeed, we would raise the question as to whether the discounters' recent momentum has reached a zenith. Does growing share from here become more difficult?

We believe that some of the hype surrounding the deep discounters may have overstated their importance and progress. While they have gained market share over the past year or so, particularly as white collar/middle class households have tried stores they may not previously have countenanced, the fact remains that over the past decade the discount element of the food market has expanded in pedestrian form.

More to the point, we would suggest that it is really only Aldi that has driven the sub-sector, by opening stores in largely 'middle class' districts. A lot of market share progress is new space in new territories, rather than strong gains in traditional 'working class' areas.

It will be difficult for the sub-sector to press on at its recent rate. High promotional activity, the stabilisation of the economy and, frankly, boredom with the limited range mean the rate of progress may slow. The key point is the range. Novelty and need are powerful forces, but if the need eases and the novelty fades, the momentum will soon slump.

Aldi is expected to continue to open stores, especially in affluent areas, and will certainly 'be there' when the industry's epitaph is written up. But, as a threat, a destabilising force and a dynamic within the industry? Probably not. Normal service is likely to resume sooner rather than later, if not already.

Dr Clive Black is head of research at Shore Capital Stockbrokers.